Pricing what you are selling is one of the most critical business decisions you’ll make, and it deserves careful consideration. I think the first question to ask is about where your product or service is positioned in the market. Luxury, mid-market or cheap. How does it stack up competitively – on functionality and quality? Are you looking to sell high volumes and accept thin margins or go for the most gross profit you can make per sale?
I worked with a guy who sold the $million laptop – he didn’t sell too many, but the margins were stratospheric.
Another decision is whether to price using a cost plus or market minus strategy:
Cost Plus is where you add a margin (or a mark-up) to your cost price, which includes all items in the cost of sale, and sell it for that price. It’s the simplest form of pricing, but it can mean that you under- or over-price what you’re selling because you’re not looking at external factors (like the competition) that will influence your sales.
Market Minus is where you look first at external factors first and develop an understanding of where price might be positioned to optimise gross profit – a balance of volume and profit per product. Your competition is one place to look, another is where your customers are currently buying the closest comparable product or service and how much they might be paying for it. The benefit of market minus is that you’re going to sell at a price that is closer to optimum than taking a cost plus approach. This may allow you to make a satisfactory gross profit, or it may not. If the price is lower than your cost of sales, then you have a problem – but it’s almost certainly a problem of having too high a cost rather than too low a price.
Whichever strategy you adopt your customers will decide whether they like your product or service and the price they are prepared to pay for it. Test your pricing very carefully, using A/B testing, to determine what price the market might stand.
You might guess from this that I’m an advocate of market pricing. If you want to drive volumes aggressively you can become the price leader, but you’d better make sure you are also the cost leader. If the highest possible margin is your game then a higher price with more modest volumes might suit you better. But it’s a decision you should make before you start selling.
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